Informal Financial Institutions: Impact Analysis of Acord's Credit Intervention through Iddirs in Dire Dawa
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Date
2000-06
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A.A.U
Abstract
Quite a sizable number of people in urban Ethiopia make their living as informal sector operators.
Among the many problems facing the sector, lack of financial intermediation by formal financial
Institutions is one. The informal financial sector is of prime importance to informal sector operators in
Ethiopia. Iddirs, iqqubs, etc, are community-based networks that provide financial intermediation of
those sectors neglected by formal financial institutions. Having understood the importance of such
institutions in credit intermediation for the fight against poverty, an international consortium of
NGOs, called ACORD has opted in working through iddirs as entry media for microcredit
Intermediation to the urban informal sector operators in Dire Dawa. This study assesses the impact of
ACORD's microcredit scheme through iddirs on program participants. Besides, loan repayment
performance along with assessing determinants of full loan repayment for the ACORD microcredit
scheme in Dire Dawa is measured in the study. The institutional viability of the small loan program
run through the iddirs in Dire Dawa is as well appraised. Since the credit market is generally believed
to suffer from the problem of information asymmetry, the study at/empts to find out whether ACORD's
iddir-based credit intermediation is sustaining serious impediments of the sort.
Based on surveyed data on ACORD's iddir-based credit scheme, the study concludes that the majority
of the program participants have benefited in most welfare measuring variables after the loan
program. These are among others, changes in income, assets, nutrition, access to medical and
educational facilities, as well as positive overall impacts on women. Regarding loan repayment
performance, the scheme has maintained a more than 90% recovery rate over the last five years and is
plausible by many microfinance institutions' standards in the country. Based on regression estimates,
it is found that loan size, and the number of dependent are significant and positively related to loan
diversion while use of bookkeeping and interest rates have shown negative Signs. on the other hand,
estimates for the full loan repayment equation depict that the coefficients for other income sources,
loan supervision visits, perceived cost of default, income from loan financed business and interest rate
are all significant and positively related to full loan repayment. With respect to institutional viability,
the provision of capacity building supports, initiatives connected to networking and intuitions
building like the formation of CBO associations, the commitment of members, etc. are promising
symptoms towards attaining institutional viability of the ACORD-initiated CBOs revolving credit
scheme in Dire Dawa. Information asymmetry is less of a problem in the Dire Dawa iddir-based loan
program, even in the face of high interest rates. This is so because peer pressure & social sanctions
play very vital roles in mitigating both adverse selection and moral hazard along with the fact the
financial services provided are kind of user-owned operations.
It can be learned from this research findings that microcredit services are important means of
alleviating poverty and impacting positive welfare shocks to program participants in Ethiopia.
Informal financial institutions like iddirs are also a viable means of reaching the poor through small
loan programs, given that they are provided some seed capital along with the necessary technical
support that later on will qualify them to graduate to form a financial operator
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Keywords
Financial Institutions, Intervention through Iddirs in Dire Dawa